Ford Turns Impressive Profit

Ford Motor Company (F - Analyst Report) returned to profitability in the third quarter of the year by posting a net income of $873 million or 26 cents per share, easily clearing the Zacks Consensus Estimate loss of 15 cents per share as well as the year-ago loss of 6 cents per share.

This was, in fact, Ford's first operating profit since the first quarter of 2008. The company, which was on the verge of bankruptcy in the middle of the year, accredited its rebound to improved product line, inviolable structural cost reduction efforts and improved results at Ford Credit.

Although revenue was down 2.5% to $30.9 billion, Automotive revenue rose $100 million to $27.9 billion from the year-ago level. This was attributed to favorable net pricing and higher volumes, primarily in North America, offset partially by unfavorable exchange. Total wholesale vehicles advanced 5% to 1,232,000 units.

The Automotive division reported a pre-tax operating profit of $446 million versus a pre-tax loss of $2.9 billion a year ago. This reflected favorable net pricing, structural cost reductions, lower material costs and improved market share -- not to mention the federal CARS ("Cash for Clunkers") program -- offset partially by unfavorable exchange and lower industry volumes.

Ford enhanced its market share across the globe during the quarter. The automaker’s market share for Ford, Lincoln and Mercury in the U.S. rose by 2.2 percentage points. In Europe, its market share increased 0.6 points to 9.2%, the highest third-quarter level in a decade. The automaker also sustained its market share in the Asia-Pacific Africa region and in the Volvo division.

Automotive: Divisional Performance

In North America, revenue went up 27% to $13.7 billion. The region showed a pre-tax operating profit of $357 million compared to a loss of $2.6 billion a year ago. The increase in revenue can be mainly attributed to hearty response received by the Ford vehicles at the U.S. Government’s cash incentive program for fuel-efficient vehicles – “Cash for Clunkers.”

Two of Ford’s models were among the top-10 buy list under the program. They are Ford Focus (ranked fourth) and Ford Escape SUV (ranked tenth). Further, Ford's U.S. hybrid sales improved, fueled by the introduction of hybrid versions of the 2010 Ford Fusion and Mercury Milan, in sharp contrast to a decline in U.S. hybrid industry sales.

In South America, revenue slipped 22% to $2.1 billion. Pre-tax operating profit in the region was $247 million compared to a profit of $480 million a year ago. This was explained by unfavorable exchange, primarily in Brazil and Argentina.

In Europe, revenue fell 22% to $7.6 billion. Pre-tax operating profit was $193 million, compared with a profit of $69 million a year ago. This improvement was attributed to structural cost reductions, lower material costs and favorable net pricing, offset partially by unfavorable volume and mix and exchange.

In Asia-Pacific & Africa, revenue dipped 12% to $1.5 billion. Pre-tax operating profit of $27 million was compared to a profit of $4 million a year ago. This reflected favorable net pricing, joint venture profits in China and cost reductions, offset partially by unfavorable exchange.

Despite being up for sale, Ford’s Volvo unit reported a 3% rise in revenue to $3 billion. The unit showed pre-tax operating loss of $135 million compared with $458 million a year ago. This was attributed to continued progress on cost reductions, favorable exchange and higher volume and mix.

Ford’s Other Automotive -- consisting primarily of interest and financing-related costs -- depicted a pre-tax loss of $243 million in the quarter.

Financial Services

The Financial Services sector revealed a pre-tax operating profit of $661 million, significantly up from $159 million a year ago. This was driven by commendable performance from Ford Credit, which recorded a pre-tax operating profit of $677 million, a staggering rise from $161 million a year ago. The rise in profit implied lower residual losses due to higher auction values and lower provisions for credit losses, offset partially by lower volume.

The company’s Other Financial Services reported a pre-tax operating loss of $16 million in the quarter compared to a loss of $2 million a year ago.

Structural Cost Reduction

Ford was able to reduce its Automotive structural costs by $1 billion during the quarter, thanks to lower manufacturing and engineering costs that included benefits from improved productivity, personnel reduction actions (primarily in North America) and Europe, and progress on implementing its common global platforms and product development processes.

Within the first nine months of the year, Ford has achieved $4.6 billion in Automotive structural cost reductions, exceeding the full-year target of $4 billion drafted in its business plan last year.

Financial Position

Ford had cash and cash equivalents of $10.1 billion as on Sept. 30, 2009. In the first nine months of the year, cash flow from operating activities of continuing operations totaled $800 million. Capital expenditures were $3.4 billion in the same period.

Automotive gross cash was $23.8 billion at the quarter-end, compared with $21 billion at the end of the previous quarter. Automotive operating-related cash flow improved by $2.3 billion to $1.3 billion compared to second quarter. In the first nine months of the year, Automotive operating-related cash outflow was $3.4 billion.

Looking Ahead

Ford anticipates U.S. industry sales of 10.6 million units for 2009, consistent with the previously announced guidance. In Europe, Ford expects industry sales to total 15.7 million units, higher than its previous guidance. The company expects upcoming production to be up both on a year-over-year and a quarter-over-quarter basis.

Ford expects to achieve Automotive structural cost reduction of $5 billion for the year. The company expects capital spending of less than or equal to $5 billion.

Although we are duly impressed by Ford’s overwhelming results, we cannot ignore its exposure to high costs due to incentives and product launches as well as risks emanating from labor contract negotiations. For 2009, the Zacks Consensus reflected a loss of $1.17 per share. This has led us to keep our Neutral recommendation for the stock.

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